THINGS are bad in the US. Really bad.
But the current shutdown, in which 800,000 workers are on furlough and all non-essential services are closed for business, is nothing compared to the "economic armageddon" looming if the country fails to raise the debt ceiling on October 17.
Here's everything you need to know.
What's happening right now?
At the moment, the US government has closed all non-essential services after Republicans and Democrats failed to agree on a government spending bill due to an ideological deadlock over Obamacare.
The stalemate means about one third of the 2.1 million public service workers have no job to go to, with delays in other areas of public life, from new mortgage applications to patents and drug trials.
Ironically, parts of the healthcare law came into affect yesterday despite the shutdown, as they are not funded by Federal money. A New York website to allow uninsured people to shop for health insurance online was flooded with 30 million hits in two days.
But although it's bad, things could get a lot worse if the two sides fail to agree on raising the $16.7 trillion debt ceiling by the 17 October deadline.
![President Barack Obama addresses media in the Rose Garden of the White House in Washington. Picture: AP Photo, Evan Vucci](http://resources1.news.com.au/images/2013/10/03/1226732/146473-199d34e2-2bb8-11e3-8800-e6347622c0aa.jpg)
President Barack Obama addresses media in the Rose Garden of the White House in Washington. Picture: AP Photo, Evan Vucci
What is the debt ceiling?
The debt ceiling - often referred to as debt limit or borrowing cap - is a self-imposed limit, much like a credit card limit, designed to keep government spending in check.
It was created in 1917 to restrain spending during World War I, but has routinely been raised over the years, including 14 times between 2001 and 2013, according to Smart Planet.
The ability to borrow is crucial because the government doesn't make enough through taxes to cover their costs. However, as the US political situation has become more polarised passing an entire annual budget is difficult, often replaced with short-term negotiations which are used as a bargaining point for political parties.
The danger now is that the current deadlock will spill into the debt limit negotiations and hold the country and the global economy to ransom.
![Federal Reserve Chairman Ben Bernanke Picture: Mark Wilson, Getty Images.](http://resources3.news.com.au/images/2013/10/03/1226732/146571-9caeeda8-2bb8-11e3-8800-e6347622c0aa.jpg)
Federal Reserve Chairman Ben Bernanke Picture: Mark Wilson, Getty Images.
Haven't we been here before?
The US came to a similar standoff in August 2011, when the debt ceiling was only raised during 11th hour negotiations.
It led to a $1.3 billion cost to taxpayers in the 2011 financial year due to the higher interest rates on bonds issued, but over 10 years is expected to cost closer to $19 billion, according to the Bipatisan Policy Centre (BPC).
What happens if the debt ceiling doesn't get raised?
If politicians can't reach an agreement, the BPC estimates we will head towards "X date" - the first day the Treasury won't have enough cash to pay all their bills - estimated to be between October 18 and November 5.
Without the ability to borrow there would be an immediate 32 per cent cut to government spending, meaning the Treasury may have to 'prioritise' some payments over others.
This would involve tough choices such as whether to pay social security or fund the FBI. Build new roads or supply food stamps?
It's also a logistical nightmare, as the government makes about 100 million payments each month.
![Vicki Maturo, of Culver City, California protests against the shutdown. Picture: AP Photo, Jae C. Hong.](http://resources3.news.com.au/images/2013/10/03/1226732/146683-6491805c-2bb8-11e3-8800-e6347622c0aa.jpg)
Vicki Maturo, of Culver City, California protests against the shutdown. Picture: AP Photo, Jae C. Hong.
How would the world react?
There is no precedent for a US default. The world's largest economy - responsible for about 25 per cent of the global economy - has never, ever defaulted on a payment and if it did, it would change everything.
This is because the US is the lynchpin in the global financial system. US treasury bonds are virtually the safest thing money can buy, while the US dollar is a global reserve.
If the US defaults, all this could change. Stock and bond markets would experience huge volatility, consumer confidence would plummet. There is a very real chance the US could be plunged back into recession, with implications for countries all around the world.
![trader works](http://resources2.news.com.au/images/2013/10/03/1226732/146810-50d93b4a-2bb8-11e3-8800-e6347622c0aa.jpg)
The Dow Jones slid 58 points as the United States government shutdown continued into its second day. Picture: Andrew Burton, Getty Images
What does Wall St think?
Banking bosses have met with President Obama to warn of the impending disaster if lawmakers can't agree, the Huffington Post reports.
Goldman Sachs chief executive Lloyd Blankfein slammed Republicans for using the healthcare law as a weapon that could lead to default.
"There is precedent for a government shutdown. There's no precedent for default. We're the most important economy in the world. We're the reserve currency of the world," he said.
Heads of Citigroup, JP Morgan, Morgan Stanley and Wells Fargo will also meet with Vice President Joe Biden to discuss the implications.
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Victoria Craw
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